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CIBC's Tucci: Fed Raising Rates Is About Asset Prices (Audio) · Bloomberg Intelligence

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  Speaker 1: That's a Bloomberg Business Flash. This is taking stock with
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  Speaker 1: Bim Box and Kathleen Hayes on Bloomberg Radio. If central
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  Speaker 1: banks want rates to rise, why do they keep buying
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  Speaker 1: up all the debt? I mean, doesn't that just increase
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  Speaker 1: the price, driving yields even lower. Let's find out. Maybe
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  Speaker 1: Tom Tucci, head of US Treasury Trading at CIBC World Markets,
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  Speaker 1: has an answer. Tom Tucci, thanks for being with us.
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  Speaker 1: So can you explain that? Does that make any sense? Well,
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  Speaker 1: I think it's the magnitude of what you're talking about
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  Speaker 1: when you say the central banks are looking at the
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  Speaker 1: raising interest rates. It's only here in the United States
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  Speaker 1: that they're talking about that, and they're not talking about
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  Speaker 1: that about raising them too dramatically. But having said that,
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  Speaker 1: I mean, if they want rates to actually increase, why
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  Speaker 1: don't they just sell some of the treasuries that are
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  Speaker 1: on the balance sheet of the US Federal Reserve because
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  Speaker 1: that creates a complete dislocation of markets in general. The
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  Speaker 1: Bank of Japan has been buying assets for over two
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  Speaker 1: decades with none of those assets ever coming back into
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  Speaker 1: the market. It will happen the same way in the
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  Speaker 1: United States. These assets will never be sold back into
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  Speaker 1: the market, So the Federal Reserve will orchestrator maintain the
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  Speaker 1: structure of interest rates through the actual overnight rate itself.
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  Speaker 1: All right, And of course we just spoke to Rob
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  Speaker 1: Kaplan here on taking stock here in Jackson Hall, Wyoming
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  Speaker 1: at the Big FED symposium today. Rob, of course President
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  Speaker 1: Dallas Fed and met it wasn't talking as much about
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  Speaker 1: bond buying. My uh, Tombody did say, basically, as Steve
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  Speaker 1: Matthews are Bloomberg News reporter here who helped cover the interview,
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  Speaker 1: negative rates in the US. Forget about it that Rob
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  Speaker 1: Kaplan says will distort the banking stem. It just wouldn't
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  Speaker 1: work here. Does that give you any comfort that at
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  Speaker 1: least one beneficial saying even if we you know, even
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  Speaker 1: if we don't have room to cut rates in a recession,
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  Speaker 1: we're not going to go there, right I think happing
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  Speaker 1: the biggest thing that's happening right now is all the
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  Speaker 1: central banks realized that these negative interest rates that we're
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  Speaker 1: seeing out of the Bank of Japan and the CD
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  Speaker 1: they're not working. The question is what is their alternative,
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  Speaker 1: And to date they don't have a solution. They don't
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  Speaker 1: have a transition mechanism or an alternative to move away
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  Speaker 1: from that. And they're concerned about moving away from that
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  Speaker 1: because what it will do to asset prices as a whole.
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  Speaker 1: So they walk this fine line. The interest rate policy,
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  Speaker 1: the monetary policy that they've established creates this kind of
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  Speaker 1: asset inflation that we've been experiencing now for years, and
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  Speaker 1: by pulling away they would deflate that. And so it's
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  Speaker 1: a very fine line that they're walking. They've painted themselves
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  Speaker 1: in the picture. And I would imagine that the symposium
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  Speaker 1: that we're having here at Jackson Hole, we're going to
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  Speaker 1: talk about a lot of different al henatives. A lot
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  Speaker 1: of different ideas are going to be thrown on the table.
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  Speaker 1: Not that I think that they have one uh cemented,
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  Speaker 1: but I think a lot of people have to rethink
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  Speaker 1: of policy, structure, economy outlooks, inflation outlooks. All these things
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  Speaker 1: have to change, and I think they're trying to adapt
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  Speaker 1: to that. Well, if all these things have to change, tom,
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  Speaker 1: I mean, isn't that going to create that very chaotic
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  Speaker 1: and dislocated situation that you just described a moment ago.
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  Speaker 1: I think it's how it's managed. If you think about it.
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  Speaker 1: From the first part of our conversation, you talked about
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  Speaker 1: raising interest rates. I don't think it's the FEDS intentions
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  Speaker 1: the significantly raised interest rates. If you look at their
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  Speaker 1: forward forecasts, which haven't been very correct, but their outlook
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  Speaker 1: has been more consistent of late, they've reduced their expectations
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  Speaker 1: for where they think the neutral terminal FED funds rate is,
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  Speaker 1: so that's pretty well established. I think everybody agrees that
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  Speaker 1: they don't expect rates to move up to what we've
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  Speaker 1: seen historically in the past, where rates have had to
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  Speaker 1: move significantly higher because we currently don't have an inflationary
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  Speaker 1: type environment. So when we talk about why are they
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  Speaker 1: raising rates, I personally don't think it has anything to
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  Speaker 1: do with anything other than asset prices. We don't have
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  Speaker 1: an inflationary picture. The economy as a whole, as far
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  Speaker 1: as GDPs calculated, certainly isn't overheating. We do have a
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  Speaker 1: stronger employment picture. But if you listen to a lot
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  Speaker 1: of the FED members, including the Chairman themselves, they still
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  Speaker 1: think there's some slack there, and I do believe that
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  Speaker 1: the makeup of them of employment is different than what
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  Speaker 1: it was even three or four years ago. So it's
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  Speaker 1: how they communicate the message about what it is that
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  Speaker 1: they're doing with interest rate policy and how they're going
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  Speaker 1: to restructure that in order for the market to understand,
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  Speaker 1: and we don't get that type of volatility or that
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  Speaker 1: asset selling that might happen if we were going into
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  Speaker 1: an extreme interest rate rising environment. Tom Today we had
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  Speaker 1: Rob Kaplan say he's patient on raising rates. Oh, patient, patient, patients,
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  Speaker 1: Steve Matthews said, implicitly, he seems to be one who's
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  Speaker 1: not necessary pushing for September at all, right for the
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  Speaker 1: rate high we had Jacob Frankel, who is the former
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  Speaker 1: head of the Bank of Israel and he's the chairman
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  Speaker 1: of JP and work in Chase International. They've got a move,
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  Speaker 1: he said, and he thinks they're helping to distort investment decision.
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  Speaker 1: It may not be the inflation problem, it's getting back
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  Speaker 1: to a more normal kind of financial markets in relationship
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  Speaker 1: with investing, which is so lacking in this country right now.
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  Speaker 1: What do you expect you from Janet Yellen tomorrow? That's
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  Speaker 1: the big speech tomorrow morning, right, and you know, I
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  Speaker 1: think that what's happening here is you have seen several
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  Speaker 1: of the FED members, particularly some of the ones that
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  Speaker 1: you would consider in the inner circle. And what I
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  Speaker 1: mean by that as Fisher and Dudley have come across
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  Speaker 1: a little bit more hawkish in the last week, and
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  Speaker 1: I personally think it's a direct result of where the
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  Speaker 1: stock market has been asset prices in general. Bill Dudley
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  Speaker 1: even mentioned the fact that he was surprised at how
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  Speaker 1: low the yield was on the turn your note, So
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  Speaker 1: I think it's in response to that. The problem the
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  Speaker 1: dislocation in the marketplaces right now are if you remember
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  Speaker 1: two years ago when the Feds are to their tapering
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  Speaker 1: and the potential for tightening, the markets swung and a
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  Speaker 1: complete uh parish direction, and that we were expecting significantly
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  Speaker 1: higher interest rates. Well we've spent two years trimming that down,
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  Speaker 1: even the Fed, as I said earlier, trimming down their
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  Speaker 1: forecast where they think that neutral funds rate is. And
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  Speaker 1: what you have now is a situation where the Fed
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  Speaker 1: loss their credibility. They've talked tough many times and never
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  Speaker 1: followed through with any action. So I think Jenny Yellen
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  Speaker 1: is going to help smooth out that credibility tomorrow. God
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  Speaker 1: leave it there. With Tom Tucci from CNBC World Markets,
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  Speaker 1: I'm Kathleen Hayes along with Pim Fox. Day one of
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  Speaker 1: our Jackson Hole coverage. This is Bloomberg coming up. Bloomberg
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